Economics · Ch 8 — Theory of Consumer Behaviour
Normal and Inferior Goods
Normal and Inferior Goods
Normal Goods
For most goods, the quantity a consumer chooses to buy rises when her income rises and falls when her income falls. Such goods are called normal goods. The consumer's demand for a normal good moves in the same direction as her income.
A normal good is one for which demand increases when income increases, and decreases when income decreases. The relationship between income and quantity demanded is positive (direct).
Inferior Goods
Some goods behave differently. For these goods, demand moves in the opposite direction to the consumer's income. As income rises, the consumer buys less of such a good; as income falls, she buys more. These are called inferior goods.
Do not confuse "inferior" with "low quality" in a moral sense. The term is purely economic: it describes a good whose consumption falls when income rises. The textbook gives the example of low-quality food items like coarse cereals.
The key distinction is the sign of the relationship between income and quantity demanded:
| Type of Good | Effect of a Rise in Income | Effect of a Fall in Income | Direction of Change |
|---|---|---|---|
| Normal Good | Demand increases | Demand decreases | Same direction as income |
| Inferior Good | Demand decreases | Demand increases | Opposite direction to income |
Income and the Changing Nature of a Good
A single good is not permanently normal or inferior for a given consumer. Its classification can change with the consumer's income level.
Consider a consumer at very low levels of income. She might buy low-quality cereals. As her income first begins to rise, her demand for these cereals might increase — at this stage, the cereals are a normal good for her. However, once her income crosses a certain threshold, any further increase in income is likely to reduce her consumption of those cereals. She switches to better-quality food items. At this higher income level, the same low-quality cereals have become an inferior good for her.
A good can be a normal good for a consumer at some income levels and an inferior good for the same consumer at other income levels. The classification depends on the consumer's current income.
The Special Case of Giffen Goods
The textbook introduces a special category of good that arises from the interaction of income and substitution effects. A rise in a consumer's purchasing power (an effective increase in real income) can sometimes induce her to reduce consumption of a good. In such a case, the substitution effect and the income effect work in opposite directions.
The demand for such a good can be inversely related to its price (a normal downward-sloping demand curve) or positively related to its price, depending on which of the two opposing effects is stronger.
- If the substitution effect is stronger than the income effect, the demand for the good and its price are still inversely related. The good behaves like a normal good in terms of its price response.
- If the income effect is stronger than the substitution effect, the demand for the good becomes positively related to its price. Such a good is called a Giffen good. …